Open European Union to the East

22/06/2012

If European Union wants to change the reality of economic stagnation and decline, some change of paradigm of its economic policy has to be made. The bailout of Greece, Spain and the other countries with troubled economy will hopefully prevent the collapse of the financial systems, but can’t create bust for production and sustainable economic growth. Even if successful, at most it will prevent further degradation of the European economy.

If to analyze the European economic crisis from historical point of view, two major economic events occurred in Europe in the last 10 years? The first was the enlargement of European Union by the post communistic countries, and second, the adaptation of the Euro.

The enlargement, created opportunity for the western economic entities to invest heavily into the infrastructure, services and industries of the post communistic countries, that suffered from big deficit of investment, and as so, these investments brought relatively high economic growth in the East European countries as well as in the Investing countries. Today, twenty years after these investment started, we can see that these investments in large were justified and the investors were positively rewarded with relatively high yields. The proof of this are the production facilities of most of the West European brands present in all East European countries, but even more are the investment in the financial systems of the East European countries.

The graph shows, that the share of foreign banks in East European countries in the EU is well above 50%, but it shows also that in non EU European countries it is well below this figure.

On the other hand, with the introduction of the Euro, the private banking and financial systems of France, Germany and GB invested heavily into the G.I.P.S.I. countries, that went mostly into increased living conditions and consumption, and not into creating new economic production capacity. Since these investments did not create additional economic basis for potential economic growth, at the day of repayment these loans could not be repaid.

As the EU markets are stagnating, and production costs are high and inflexible, sustainable Economic growth can be created only by investing in countries with potentially high economic growth, in productivity increase and/or investing in new markets. This can work only if the investments will be channeled into countries with some relative advantage upon the western economies, like lower wages, lower government spending and taxation derived out of it (viz. chart), more flexible labor market, and luck of infrastructure causing bottlenecks in the productivity of the country.

These countries with potential big growth, low wages, low taxation, flexible labor, and luck of infrastructure are the European countries East of European Union and i mean the post USSR countries, with their waste undernourished population, and all the other advantages for potential growth. These countries are with relatively low debt and relatively low standard of living. So my conclusion is, if European Union wants economic growth, it has to open its economy and its doors to the post USSR countries, and making them part of European Union, to where historically and culturally they anyway belong.